How to restore public confidence in banking

The banking sector of Bangladesh is passing through a challenging time. Since internal mismanagement, systematic corruption, abuse of power and accountability deficit became common in this sector, it started to witness large-scale scams. 

These scams affected public confidence, which is considered an essential component of a healthy banking system. On 14 July 2018, Bangladesh Bank's former governor Fazle Kabir, while addressing a conference, said that 'mistrust over the banking sector is an ominous sign.' 

Recently, the High Court Division while hearing a case involving embezzlement by bank officials remarked that 'the biggest crimes were taking place in the banking sector and such crimes crippled the country'. 

These two remarks came four years apart, from two different institutions, but they point to the same issue. While the judiciary has commented on the criminal element that dragged the banking sector to a critical state, the former governor reflected on its effects. 

This article briefly focuses on the public confidence crisis in the banking system of Bangladesh and suggests some measures that stakeholders may consider to improve the situation.

The source of banks' financial strength is the deposits of customers. Banks offer different schemes to attract customers and collect money from them. The two main things these schemes offer depositors are the monetary reward against deposit and safe custody of the money deposited. 

Banks utilise these deposits to create money. It lends to the borrowers, which are returned at a particular interest rate. In between these two forms of transactions, banks make a profit. 

When the public finds that banks regularly get involved in unethical practices and scams, they get scared and start to lose confidence in them. This fear gets intensified when it happens in a weaker legal system. The result of losing confidence might be diverse, from relocating the money to a different jurisdiction to choosing other non-banking means for saving.

Since 2012, large-scale bank scams in Bangladesh have become routine incidents. It began with the revelation of Hallmark Group's Tk3,547 crore loan scam with government-owned Sonali Bank.

Later, in 2013, Bismillah Group's Tk1,200 crore loan scam with the Janata Bank and four other private banks became public. In 2014, the Basic Bank's loan scam of around Tk4,500 crore came to light.  Subsequently, the Farmer's Bank Tk1,800 crore scam raised questions about giving licences to open new banks on political considerations.

Bangladesh Bank lost $81 million of public money in the hands of foreign hackers in 2016. In 2018, Crescent Group's Tk1,745 crore loan scam with the Janata Bank was exposed. 

Later, in 2019, it was revealed that former managing director of the NRB Global Bank and former head of multiple other financial institutions, Prashant Kumar Halder (PK Halder) with the help of his allies in Bangladesh Bank and other banks misappropriated loans of approximately Tk10,200 crores from multiple financial institutions and laundered that to several countries. 

These repeated loan scam incidents of similar nature indicate that public and privately owned Bangladeshi banks learned no lesson from the past incidents. They did not take effective measures to prevent the repetition of these incidents. 

On the other hand, although cases have been filed in court by banks as well as the Anti-Corruption Commission, the success in recovering the amount lost is very rare. Moreover, in some cases, accused persons have not been detained yet. What measures the State has taken to bring fugitives back from abroad and face the trial is also unknown.

After getting caught in multiple large-scale loan frauds, banks seem hyperactive in recovering money due from small-scale borrowers by creating immense pressure on them. This approach sends a wrong message about banks to society in general and borrowers in particular.

Considering the number of the Artha Rin Adalat Ain 2003 suits and cheque dishonour cases under section 138 of the Negotiable Instruments Act 1881 filed by different banks against loan defaulters, we see most of the cases are filed against small-scale borrowers. Banks' pressure on those small borrowers has forced them to see bad days in life and business. 

These have severely affected public confidence in the banking system. Prospective borrowers are now more sceptical about taking a loan from banks. There is a visible trend among borrowers switching to other non-institutional sources of lending. 

In this post-pandemic period and global political unrest situation, regaining 'public confidence' in the banking sector is necessary to save the economy from further complications. 

To do so, stakeholders may consider a variety of measures. Firstly, a strong intelligence unit could be formed and made functional in every bank to monitor potential corrupt employees. Because without the assistance of bank officials, every loan scam is unimaginable. Secondly, all political considerations for compromising standard requirements and loan scrutiny should be avoided. 

Thirdly, an information exchange mechanism among all banks regarding loan defaulters could be established so that habitual loan defaulters cannot take advantage of flaws in the system. Such information exchange on loan defaulters would reduce the risk for other banks. 

Fourthly, banks could act more practically with regard to defaulters of small amount borrowers. It could avoid immediate legal action to recover the loan because recurrent legal action against small-amount defaulters has distorted the banking sector's image and also overburdened the judiciary with cases. 

Instead, while issuing a loan to small borrowers, banks could include an Alternative Dispute Resolution (ADR) or arbitration clause in the agreement. The content of the ADR or arbitration clause could be drafted in a fashion that allows the bank and its borrower to resolve the issue out of a courtroom legal battle. 

Fifthly, banks could also introduce an advertisement policy that would convey the positive aspects of banking to the people. 

Finally, banks that faced loan scams should keep the people updated about the measures they have taken and the progress they have made in the recovery of money. It has to be kept in mind that misinformation and fake news are easy to circulate, and they have the power to shake public confidence. 

Therefore, if any kind of fraud occurs in any bank or any bank official is found to be involved in an illegal or unethical practice, respective banks should disclose this openly instead of hiding. 

Ashfaquzzaman Chowdhury is a Research Fellow at South Asian University, New Delhi and a member of the Sylhet District Bar Association.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.